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Epwin Group Plc

Interim results in line but operating environment remains difficult

Epwin Group like for like revenue was marginally ahead yoy at £142.4m, with notable growth seen in the extrusion, mouldings and distribution businesses, but declined on an absolute basis from £149.9m, due to the loss of the two largest customers in FY17. Group adj. operating profit was £7.1m (HY17: £11.1m) as margins were impacted by increasing cost input pressures. We marginally increase revenue estimates but leave FY18 profit forecasts unchanged on the back of today’s statement and acknowledge, as management has previously stated, profitability will be H2 weighted (ZC FY18 revenue and adj operating profit forecast of £285.2m and £19.6m respectively). The industry has experienced a difficult period with weak consumer demand and widely reported cost input inflation. This has been exacerbated for Epwin due to the customer issues experienced last year. The reiteration of FY18 guidance in today’s results should be viewed positively against this backdrop. Our expectation is that FY18/19 should prove the trough in profitability for the Group. On current year forecasts Epwin trades on 7.2x earnings and an EV/EBITDA of 4.7x, yielding 7.0% with net debt to EBITDA of less than one times.

§  Cautiously optimistic results but headwinds remain: Whilst revenue declined on an absolute basis, excluding the impact from the lost customers and the acquisition in the period, it was marginally ahead at £142.4m. This highlights the continuing good performance of certain parts of the business such as Stormking and the Optima window system where Epwin has taken market share. The solid top line performance combined with the acquisition of Amicus leads to a small, c.2.5%, increase in revenue estimates across the forecast period. In terms of profitability, forecasts are maintained at £19.6m EBITA in FY18. This reflects the delays in site consolidations and developments, leading to a more prudent view on the impact of operating cost reductions, and the continuing cost pressures coming through.

§  Profit forecasts H2 weighted:  ZC forecast FY18 revenue of £285.2m a 4.4% decline yoy but a 2.5% upgrade on the estimate prior to today’s results (prev. £278.6m). In recent years the business has experienced a slight weighting in terms of profitability to H2 due to the timing of investment and customer losses in FY17. This will be more pronounced in FY18 as the business reverts to a more usual seasonally driven weighting. In addition, the improvement in H2 profitability is predicated on further price increases, closure of the Cardiff facility and additional operating efficiencies coming through as planned.

§  Valuation: Epwin Group shares trade on 7.2x current year earnings and yield 7.0% with the balance sheet remaining lowly geared, with less than 1.0x EBITDA to net debt. At the current level of 75.6p they offer value and limited leverage risk for those investors prepared to wait for an improvement in the cycle.